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Investments Assignment

Part I: Investing Basics


A. What Are Investments?
Investing is how you make your money grow, or appreciate for long term financial goals. It is a
way of saving your money for something further ahead in the future.
Saving is a plan to set aside a certain amount of your earned income over a short period of time
in order to be able to accomplish a short term goal. It is a plan of action where you plan on
acquiring a certain amount of money by redirecting some of the money you have received from
your various sources of income.
Investing, on the other hand, is a much longer term activity. We consider investing as an action
that is based on long term goals and is primarily accomplished by having your money make more
money for you.
There are three main reasons to invest. You can beat inflation, achieve financial goals like buying
a car or paying for college, and retirement. Yes, you should start thinking about retirement now.
You can choose from many investing options. You can invest in stocks, mutual funds, or bonds!

B. Why Invest?
A few people may stumble into financial security. But for most people, the only way to attain
financial security is to save and invest over a long period of time. You just need to have your
money work for you. Thats investing.
There are two ways your money can work for you:

Your money earns money. Someone pays you to use your money for a period of time.
You then get your money back plus interest. Or, if you buy stock in a company that pays
dividends to shareholders, the company pays you a portion of its earnings on a regular
basis. Now your money is making an income.

You buy something with your money that could increase in value. You become an
owner of something that you hope increases in value over time. When you need your money
back, you sell it, hoping someone else will pay you more for it.
Compound interest is a key aspect of investing. With compound interest, you earn interest
on the money you save and on the interest that money earns. Over time, even a small
amount of savings can add up to big money and help you achieve your financial goals.
Sweet: If you buy a $1 candy bar every day, it adds up to $365 a year. Put that $365 into an
investment that earns 5% a year, and it would grow to $465.84 by the end of five years. By
the end of 30 years, you would have $1,577.50. Thats the power of compounding.
All investments involve some degree of risk. If you intend to purchase securities such
as stocks, bonds, or mutual funds, it's important that you understand before you invest that
you could lose some or all of your money.
Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest
in securities is not federally insured. You could lose your principal, which is the amount you've
invested. Thats true even if you purchase the securities through a bank.
The reward for taking on risk is the potential for a greater investment return. If you have a
financial goal with a long-term horizon, you may make more money by carefully investing in
higher-risk assets, such as stocks or bonds. On the other hand, investing solely in cash
investments may be appropriate for short-term financial goals. The principal concern for
individuals investing in cash equivalents is inflation risk, which is the risk that inflation will
outpace and erode returns.

C. Types of Investments

Stocks --- Perhaps the most common misperception among new investors is that stocks are
simply pieces of paper to be traded. This is simply not the case. In stock investing, trading is
a means, not an end.
A stock is an ownership interest in a company. A business is started by a person or small
group of people who put their money in. How much of the business each founder owns is a
function of how much money each invested. At this point, the company is considered
"private." Once a business reaches a certain size, the company may decide to "go public" and
sell a chunk of itself to the investing public. This is how stocks are created.
When you buy a stock, you become a business owner. Period. Over the long term, the value of
that ownership stake will rise and fall according to the success of the underlying business.
The better the business does, the more your ownership stake will be worth
Stocks are but one of many possible ways to invest your hard-earned money. Why choose
stocks instead of other options, such as bonds, rare coins, or antique sports cars? Quite
simply, the reason that savvy investors invest in stocks is that they provide the highest
potential returns. And over the long term, no other type of investment tends to perform
better.
On the downside, stocks tend to be the most volatile investments. This means that the value
of stocks can drop in the short term. Sometimes stock prices may even fall for a protracted
period. For instance, the 10-year return for the S&P 500 was slightly negative as recently as
late 2010, largely due to the 2008 financial crisis and the early 2000s tech bubble bursting.
Bad luck or bad timing can easily sink your returns, but you can minimize this by taking a
long-term investing approach.
There's also no guarantee you will actually realize any sort of positive return. If you have the
misfortune of consistently picking stocks that decline in value, you can lose money, even over
the long term!
Bonds --- A bond is an agreement on a loan between the issuer and the person buying the
bond (bondholder). The bondholder has lent a certain amount of money to a government
agency, municipality, or corporation and is given interest on the loan.
The term of a bond is given a fixed-rate at the time of issue and expires on the specified
maturity date. At that time, the issuer is responsible to pay the bondholder the face value of
the bond. Throughout the term of the loan, the issuer also pays interest to the bondholder.
The interest amount is set when the bond is issued.
Bonds can vary in term length. The can be a short as one year or as long as 30 years. Usually,
the longer the term on the bond, the better interest rate the bondholder receives.
If you choose to sell your bond before the term is up, you can, but you lose money. Its always
best to keep bonds for their full term.
Mutual Funds --- When investors decide to invest in a mutual fund, then money is put in a
pool of money from other investors to create a large portfolio so everyone benefits from
bigger profits. Most funds buy a variety of investments like stocks, bonds, or other securities.
Because there is such a variety of different investments in one mutual fund, there is not as
much of a risk. Usually if one investment has a bad return, another will make up for that loss.
To invest in a mutual fund, an investor buys shares of the fund and becomes a shareholder.
That fund makes money two ways: by earning dividends or interest on its investments and by
selling investments that have grown in price. The fund then pays out its profits to the
shareholders.
Note: This is better if you are investing for long term profits

Part I Assessment
True/False: Indicate whether the statement is True or False. If the statement is false, explain
why.

1. False Savings accounts are ideal for long-term investments. Set aside for short term
investments because they are meant to accomplish a goal.
2. True Investments become your income when you retire.
3. True Dividends are given to shareholders on savings accounts.
4. False Stocks always increase in value over time. Stocks can increase or decrease
depending on how well the company is doing.
5. True Investments earn compound interest.
6. False Investments are insured by the FDIC. They are not federally insured and can lose
your principal, which is the amount you've invested.
7. False Bonds are ownership interest in a company.
A bond is an agreement on a loan between the issuer and the person buying the
bond.
8. True Stocks have the highest potential return on investment.
9. False The shorter the term on the bond, the higher the interest earned. The longer the
term the better interest rate it has.
10.True Mutual funds spread out the risk of investments among many participants.
Short Answer: Respond to each prompt in your own words. Write in complete sentences!
11.Why do people invest in stocks, bonds, and mutual funds?
People invest in stocks, bonds, and mutual funds to save and earn more money
over time. Stocks are used for a person to put a small amount of money in and in
return hopefully earn a lot more when the stock is sold. Bonds are used to keep for
a long period of time and then later sell them to earn more money than they were
originally worth. Mutual funds is money put into a pool in hopes if the person ever
needs the money that the pool will provide them with support.
12. Why are investments considered riskier than traditional savings accounts?
Investments are considered riskier than traditional savings accounts because an
investment is not guaranteed to earn money. For example, when making an
investment on a company such as in stocks it is a gamble because the company
can go under and the person can lose more money than what they started out with.
There is no guarantee that there will be more money or any money during the
investment.

Part II: Investments Research


Use the following website to conduct research about more types of investments. Record your
notes in the chart provided and then answer the questions that follow.
http://www.investopedia.com/university/20_investments/4.asp
Description

Objective

Advantages

Disadvantages

Main Uses

Collectible
s

Any physical
asset that
appreciates in
value over
time because
it is rare or it
is desired by
many

Depends on
the person
Take long to
increase in
value, offer no
assurances to
value in the
future and no
income

Offer
reasonable
protection
from inflation

ADRs

Stock hat
trades in the
United States
but represents
a specified
number of
shares in a
foreign
corporation

To save
individual
investors
money by
reducing
administration
costs and
avoiding duty
on each
transaction

Real Estate
& Property

Real estate
investments
by purchasing
a house that
can include
vacation
homes,
commercial
properties,
land, condos
and other
possibilities
that allows
you to make a
profit
When
someone
wants to
invest but
does not want
to buy a
company and
decides
whether or not
he stock is a
good buy

Allows the
investor to
target his or
her objectives
and provide
income

Allows you to
invest in
companies
outside North
America with
greater ease
By investing in
different
countries you
have the
potential to
capitalize on
emerging
economies
Help achieve
your goals
Mortgages
allow you to
borrow against
the property
up to three
times the
value

Mutual
Funds

Investors buy
mutual funds
as a long term
investment

You get to own


several
companies
Easily make
monthly
contributions
Money is being
managed by a
professional
manager

Not very liquid


Do not provide
any tax
protection
Do not offer
any income to
the investor
True value can
often be
difficult to
determine
Do not count
for retirement
Political factors
Exchange rates
Language
barriers
Lack of
standards
regarding
financial
disclosure can
make it difficult
to research
foreign
companies

Capital
appreciation
Inflection
protection
Self-fulfillment

Selling
property
quickly can be
difficult
Holding costs

Provides
income
Capital
appreciation
leverage

Most
companies
dont come
close to
beating market
averages
Fund managers
take a slice of
the profits for
their work
You pay

Capital
appreciation
Provides
income
Tax-deferred
savings

Capital
appreciation
Income
Diversification

Common
Stock

Sometimes
referred to as
shares,
securities, and
equality, is
ownership in
part of a
company

No investment
provides better
returns as a
reasonable risk
than common
stock

Common stock
is very easy to
buy and sell
Large part to
the growth of
the internet
Over 11,000
public
companies in
North America
to choose from

management
fees whether
the fund
actually makes
you money or
not
Original
investment is
not guaranteed
Stock is only
good as the
company in
which you
invest

Capital
appreciation
Income
liquidity

1. Which type of investment is the riskiest? The type of investment that is the riskiest is
2.
3.
4.
5.

6.
7.

Collectibles because they can take very long t increase in value and they offer no
assurances as to their value in the future, and offer no income.
Which type of investment has the greatest return? The type of investment that has the
greatest return is Common Stock because it provides the better return as a
reasonable risk and is very easy to buy and sell.
Which type of investment is best for diversifying your portfolio? The type of investment
that is best is the Mutual Funds because you get to own several companies and
make an easy monthly contributions .
Which type of investment provides best returns at a reasonable risk? Common stock
because it is easy to buy and sell with a large part to the growth of the internet
and over 11,000 public companies in North American to choose from.
Which type of investment do you feel the least likely to pursue in the future? Why? ADR
because it comes with more risks and involves political factors and exchange rates
and it is can be very difficult to research foreign companies. There are political,
exchange rare, and inflationary risks.
Which type of investment do you feel most likely to pursue in the future? Why? Common
stock because it is very easy to buy and sell with a large part of growth. It also has
the best returns as a reasonable risk.
Why is it a good idea to invest in several different forms? It is a good idea to invest in
several different forms because the investments are not guaranteed to make
money. There are also different advantages and disadvantages to each investment
made. Each investment does not guarantee a profit and by investing in more than
one type there is a better chance to make a profit.